The Forest Mafia: How Scammers Steal Millions Through Carbon Markets

When the product is invisible, the cons are endless.

By Ryan Jacobs: When the balding Australian first stepped off the riverboat and into the isolated pocket of northeastern Peru's Amazon jungle in 2010, he had what seemed like a noble, if quixotic, business plan. An ambitious real estate developer, David Nilsson hoped to ink joint venture agreements with the regional government of Loreto province and the leaders of the indigenous Matses community to preserve vast thickets of the tribe's remote rainforest. Under a global carbon-trading program, he wished to sell shares of the forest's carbon credits to businesses that hope to mitigate, or offset, their air pollution.

The product is invisible, poorly understood, and regulation is extremely limited.

Located a six-day ride from the frontier city of Iquitos, the jungle’s vegetation, soils, and looming trees store an immense amount of carbon dioxide—roughly one ton, the equivalent of one UN-backed carbon credit, per tree.

In an ideal scenario, this is how it's supposed to work: A community in a developing country works with an NGO or developer to design a plan to protect a large swathe of forest and thus prevent the release of the harmful chemical compound into the atmosphere, in accordance with the United Nations’ program called REDD (Reducing Emissions from Deforestation and forest Degradation). Then, it can get the emissions reductions certified by a third-party auditor and sell the resulting carbon credits to corporations in developed countries interested in reducing their own carbon footprints. (Deforestation accounts for roughly 17 percent of all global greenhouse gas emissions.)
Nilsson's Hong Kong-based company, Sustainable Carbon Resources Limited, planned to help the indigenous community set up the Peruvian carbon credit project in exchange for sharing the profits once they were sold. If Nilsson’s plan worked, in theory the forest would be spared from loggers, his company would net some profit, and the indigenous community would receive millions of dollars in funding for education and medical care from investors and corporations interested in expanding sustainability and social responsibility efforts.  
Nilsson recruited Dan Pantone, an Iquitos-based American ecologist with close contacts in the Matses community, as a guide to show him around the jungle, and, more importantly, introduce him to the right decision-makers.
"[Nilsson] told me, 'You're going to be a millionaire in a year,’" Pantone said of his earliest phone conversation. "He said he was going to help the indigenous people."
Early on, Nilsson didn't seem particularly interested in hammering out the details of a potential forest project. "He didn't talk about REDD; he just wanted the contact," Pantone said of Nilsson’s early conversations with Angel Dunu Maya, a Matses chief.  "Once he had the contact, he had everything he wanted from me.” In meetings with Peruvian lawyers, Nilsson was also advised about the difficulty of proving the risk of emissions, as REDD requires, in such an isolated area that was already designated as a reserve by the federal government. He also faced other, more obvious challenges. "The government asked him to show his sources of income, and he was unable to do that," Pantone added. "So that was a dead-end for him."

Nilsson flew back to Australia for Christmas, but he was not deterred. In February 2011, he reappeared in the jungle wearing what would become his signature, Crockodile Dundee-style Akubra cowboy hat.

Unable to broker a deal with regional government officials, he met with Matses leadership in Iquitos in March and presented a PowerPoint that detailed the incredible profits he claimed the tribe would receive. He was granted permission for a meeting in Matses territory, where the community would decide whether or not to sign the contract he had presented. According to Indian Country Today, a news service that caters to a Native American readership, the leaders were told that the agreement had to be written in English because “the World Bank and the UN only recognize the English language.” The contract, according to the indigenous rights organization Interethnic Association for the Development of the Peruvian Rainforest (AIDESEP), which advises the Matses and other tribes, gave "considerable control and powers to [Sustainable Carbon Resources Limited] for an indefinite period. Effectively this would reduce the Matses to the role of forest 'gatekeepers' rather than playing an active part in the administration or co-management of the Project."

By this point, Pantone’s relationship with Nilsson had soured, and his suspicions had boiled over into a full-fledged investigation into his past. In late March, Pantone was able to reach two of Nilsson's former associates, who claimed that they and indigenous communities in the Philippines had been victims of his deceit. Cecille Villanueva, who worked at an Australia-based energy consultancy company called Ienergy, sent the following to Pantone in an email:

We have known him to be deceitful, but also careful in covering himself from possible legal repercussions. But his character certainly shows a trail of … false claims to further his financial objectives, which
in the past involved illegally selling land and running with the monies of
vulnerable people. We hope this does not happen to the Matses.

She was referencing spurious land deals Nilsson had allegedly made with residents of the small South Pacific island nation Nauru. In the 1990s, according to transcripts of meetings in the Queensland Parliament, Nilsson had sold six rural lots in a coastal area development for $70,000 each. However, the lots did not exist and the investors in Nauru never received anything.

In addition, Nilsson's supposed carbon-credit firm began looking more and more like a shell company. It didn't have a functioning website or a physical office, according to a report from The Sydney Morning Herald.

After Pantone and the Matses shared theses details with AIDESEP and the Peruvian human rights monitor Defensoria del Pueblo, as well as the local newspaper, critics quickly labeled Nilsson a "carbon cowboy," and his plans began to unravel.

According to reporting by GlobalPost's Simeon Tegel, Defensoria del Pueblo instructed the Matses against signing a contract they couldn't read. After learning this, Nilsson stormed into the group’s office. 

“He shouted. He insulted us, and we told him to leave,” Lizbeth Castro, the director of the office, told GlobalPost. “He said he was going to sue us and this would not stand. We told him, no problem, sue us. But we will keep on doing our work.”

In April, the Matses general assembly rejected the project.

But Nilsson continued to search for ways to get it off the ground, setting up meetings with another impoverished indigenous group, the Yaguas. He also dropped the Sustainable Carbon Resources Limited moniker and began operating under a new entity called Amazon Holdings. 

By October 2011, he had convinced Javier Fasenando, the president of a Yagua federation, to sign a deal that would allegedly provide profits to the community "in return for rights to the 'wood' on their land." 

According to GlobalPost: 

Fasenando said that he understood the terms of the agreement. “Those who criticize it come from other communities,” he said. “They are envious.”
But at the end of our interview in Spanish, Fasenando struggled to confirm even the spelling of his own name. Other indigenous leaders confirmed to GlobalPost that he is unable to read or write.
Fasenando also was unable to tell me where FEPYRA’s copy of the agreement was.
Nilsson declined to provide a copy of the contract to GlobalPost, saying that he needed written permission from the Yagua communities involved in the deal.

Then, in an undercover operation led by investigative journalists with 60 Minutes Australia that aired in July 2012, Nilsson explained the real extent of his plan for the carbon deal to a producer posing as a potential investor as they sat over a huge map of the territory. 

David Nilsson: It’s going to be billions.
Producer: Beg your pardon?
David Nilsson: Billions. I just, I’m scared to quote it, because it’s fucking huge, put it that way.

...

David Nilsson: My contracts are 200-year contracts, etched in stone, so when the carbon’s gone, people can come through and harvest the rainforest there. We’d have a forest management plan they can reforest, they can plant palm oil, they can cut all the timber. No one can stop them. No one can stop them.
Producer: But by doing this carbon plan, you’re stopping that happening?
David Nilsson: Yeah, but the carbon plan only goes for 25 years. The contracts still run and there’s enough timber there to supply the world down there. China will love it.

The project would profit not only from carbon credits, but also from felling the very forest it was allegedly protecting. Once the lead investigator, Liam Bartlett, revealed himself, Nilsson simply said that it wasn't a scam, and declared the interview over. 

More than a year later, Nilsson refuses to discuss the details. Reached for comment by The Atlantic twice on his cell phone, he hung up after we identified ourselves. He did not respond to questions sent to his email address. 

He has also attempted to smear anyone who questioned his schemes. He filed charges against Pantone for fraud in Peru (Pantone was eventually cleared of any wrongdoing) and later set up a defamatory website that accuses him of horrific crimes. Nilsson also filed criminal charges against a Matses leader for fraud. 

Chris Lang, a long-time environmental advocate who was one of the first to report on Nilsson’s scams on his website redd-monitor.org, received an email from his service provider, Bluehost, in August of 2011 that forced him to delete "all images and references to the name" of Nilsson. The company “had received a ‘report of Terms of Service Violations,’” which, under its policies, includes divulging private information about third-parties without their consent. 

After the 60 Minutes investigation, Nilsson attempted to impugn the credibility of the Australian journalists Stephen Rice and Liam Bartlett. 

In an email to The Atlantic, Rice explained: 

Nilsson is demanding that I be sent to jail for entering Peru illegally on a tourist visa. In fact, I was there on a legitimate journalist visa…
Most of [the online attacks against me and others are] just semi-literate rubbish, with laughable sources as “evidence,” but there’s no doubt Nilsson is pushing to have criminal charges laid against Liam Bartlett and I in Peru to make it difficult for us to return. 
He’s lodged a 72-page complaint against me with the Australian journalists Association alleging I breached the journalist’s code of ethics and another against our television network (Channel Nine) with ACMA, the Australian broadcasting regulator. None of that is of any concern – our story was entirely accurate – but the complaints reveal the manipulation Nilsson employs.

Though there is a warrant for Nilsson’s arrest in Peru (for defamation, which is a criminal offense there), no international law enforcement organizations have yet investigated him for his alleged crimes. The Yagua have not received any money from him, according to Al Jazeera. It's unclear whether he's still peddling carbon projects to potential investors. 

*** 

Though Nilsson's cons were extreme, international law enforcement authorities and environmental advocates say that the carbon markets are extremely vulnerable to financial fraudsters like him, especially when it comes to forest projects. Their shell games can also be hard to spot. As William Magrath, the World Bank's lead natural resource economist for rural development in Asia, once put it in a pun in a memo to his colleagues: "It's a jungle out there." In a meeting he attended with Interpol officials a few years ago, Magrath recalled, one man leaned back in his chair and called carbon "a con man's dream." The product is invisible, poorly understood, and regulation is extremely limited.  

Despite the risks, carbon is the "world's fastest growing commodities market" valued at about $176 billion in 2011, according to the World Bank. The European Union Emissions Trading System (EU ETS), the highest volume compliance market, accounts for $148 billion of that. Countries in Europe legally require top polluters to remain under certain government-issued emissions allowances, but companies who emit less can trade those credits to those who need more. Beyond those allowances, companies can purchase carbon credits, or offsets, which are linked to emissions reductions projects, like factory retrofits or other energy efficiency projects. If the U.S. decided to establish its own cap-and-trade market, the value of the trades could reach as high as $2 to $3 trillion. Credits from forest projects, like Nilsson's would have been, have not yet been approved for the compliance markets, but they are actively sold on a second kind of market for voluntary buyers interested in offsets.

Unlike the mandatory compliance credits, voluntary offsets aren't required, but they essentially allow big companies to claim they're more sustainable because they're financially supporting environmental projects, like forest conservation. Though much, much smaller, the $576 million voluntary offsets market, which includes credits from REDD projects, will likely expand as the formal compliance market grows. Many of the sales in this market are linked to corporate social responsibility efforts and are often meant to offset airline travel, large conferences and events, and manufacturing. A remote forest community, surrounded by carbon-storing trees, might offer their credits to say, a major retailer who wants an annual report that boasts a "green-friendly" initiative, or the like.

But without legally "binding targets" or formal regulatory bodies designed to verify the credits, voluntary offsets are also the area that’s ripest for exploitation. Already, many projects that don’t meet the UN’s environmental requirements end up eventually being sold on the voluntary carbon market, according to a June report from Interpol. Other projects offer carbon credits that are inflated in number based on misleading methodologies, do not exist on anything but paper, or, like Nilsson’s, may serve as a front for other illicit activities.

As the only international law enforcement agency "with a trans-boundary mandate, with designed units addressing both environmental and financial crimes," Interpol is one of the only agencies fully equipped to parse the data and identify carbon fraud at both the project and market levels. About a year ago, it began expanding and developing its intelligence on the emerging markets so that it could eventually advise and assist its 190 member countries in dismantling scams as new ones came online. 

"Police speculate that the bomb scare provided a diversion so that employees wouldn't see phantom cursors moving across unattended screens."

Its recent report intended to put its member countries "on notice about the potential pitfalls" of the trading systems, according to Davyth Stewart, a criminal intelligence officer with Interpol’s environmental crime unit. It highlighted the types of financial fraud the EU-ETS has already become accustomed to in hopes of forestalling similar schemes abroad. “The experience we've had with Europe was that it was often the case of chasing their tail," Stewart said. "You know, constantly on the backfoot, and having to plug holes that were being exploited. By the time they get around to discovering the fraud, a number of billions of dollars have already gone missing."

***

A diagram of how a typical "missing trader fraud" works (Europol)

On Tuesday, June 2, 2009, carbon traders on the Paris-based BlueNext exchange noticed “a terrifically high level of activity” on their system, according to Chris Perryman, Europol’s project manager for organized and economic crimes. A record total of 19.8 million credits swept across the market, a volume “160 percent higher than … average daily trading volume for the first five months of the year (7.4 million),” according to a recent article by Queensland University of Technology professors Peter Martin and Reece Walters in the International Journal for Crime, Justice, and Social Democracy. The next day, activity plummeted to 2.5 million trades. The brokers communicated their concerns about the transactions to the government, and French police shut down the market to investigate the possibility of fraud.  

The crime that the authorities uncovered was a simple and elegant manipulation of the European value-added tax (VAT) system, called “missing trader fraud,” according to Europol. The strategy had been used in various scams since the 1990s, particularly with small, high-value products like computer chips and mobile phones, according to Perryman. In the European Union, when products and commodities are sold across borders, the buyers are not required to pay taxes to the seller, but they are when those purchases occur within one member state. In the case of the “missing trader” scheme, a seller uses shell brokers to sell the carbon credits and pocket the taxes from the buyer, and then disappears. 

But the intangible quality of carbon credits dramatically simplified the process. The criminals no longer had to fake transactions by shipping empty containers or forging documents. “Just by sitting and selling goods behind your desk, on your computer, you would suddenly have these … transactions which would allow you to sell goods without VAT across a border and then sell goods with VAT in your own country. And nobody was there to verify it.”

After the BlueNext exchange investigation, authorities concluded that “up to 90% of all carbon trading in some countries was a result of these fraudulent activities. This fraud was estimated to have resulted in losses to several governments of around 5 billion euros in just over 18 months,” according to the Interpol report. The fraud also destroyed market confidence, further compounding the economic loss. According to Perryman, organized criminal syndicates have used the cash they earned from this type of carbon trading to fund other illicit activities in Europe, including cigarette smuggling, drug smuggling, and human trafficking. France and other European countries have since changed their trading rules to remove VAT from carbon transactions.

***

But VAT was only one of many financial scams.

According to Interpol, the lack of cross-checking or regulations between different international markets and exchanges has also allowed carbon credits from emissions reductions projects to be used on the same market to offset emissions more than once, eliminating the net environmental benefit the credits are supposed to provide.

"We know they traveled the world. Traveled business class. They had nice cars. Jaguars. Porsches. Nice clothes. Rolex watches.”

Additionally, hackers have also compromised weak computer security systems to steal credits. In January 2011, Europol and Interpol thwarted an attempt by Romanian web bandits to sell $38.5 million worth of stolen carbon credits to buyers in the United Kingdom, Austria, and the Netherlands, according to the Wall Street Journal. They had hijacked foreign servers, “using them as robots to penetrate trading systems’ security and accessing member accounts through corporate systems that weren't well guarded.”

In another case, hackers broke into the Czech Republic’s electronic carbon registry, run by the state-owned energy firm OTE. A bomb threat was called into the OTE’s Prague offices as the criminals offloaded the stolen credits, $37.7 million worth, to foreign accounts on registries in Estonia and elsewhere. “Police speculate that the bomb scare provided a diversion so that employees wouldn't see phantom cursors moving across unattended screens or other telltale signs of a breach,” according to Ecosytem Marketplace’s report.

Hackers have also set up fake carbon registry websites that have successfully lured companies and brokers to provide their account login details, according to Interpol’s Stewart. This technique, known as “phishing,” poses an ongoing risk as new registries are established with unfamiliar requirements in emerging markets. “It becomes easier, particularly when you’ve got new investors investing, and markets are new, for people not to really realize that the website that looks legitimate and has the nice logos on it is not actually a legitimate one,” he said. “Because the registries and the websites don’t yet have enough of a broad reputation.”

Since the EU has introduced new VAT rules and a single unified registry, much of the fraud has been eliminated from Europe’s market. But Perryman is still monitoring the system for high-value money laundering. Because millions of credits can be traded in one transaction, they can serve as an easy front for concealing the movement of illicit cash earned from other criminal activities.

***

Assuming the credits are real, the financial schemes merely result in economic losses. But manipulations also occur on the project side, as well, and that type of fraud can undermine the very emissions savings and environmental good that companies and investors are supposedly paying for. The value of the credits can be superficially inflated, or entirely invented, as Nilsson’s case illustrates. Even when developers are required to hire outside auditors to verify the emissions reductions, some of the projects are still not doing what they advertise.

Carbon cowboys can flourish quite easily because the product they sell is “an abstract commodity of nothing happening.”

In an ideal world, developers set up efficiency projects that demonstrate clear reductions in emissions. Auditors review project claims, visit the site, verify they are real, and approve them under the UN’s Clean Development Mechanism as Ceritified Emissions Reductions (CERs). Once they are approved and registered with the United Nations Framework on Climate Change, they can be traded over the compliance markets to offset the pollution of large emitters and meet legally mandated caps. In the case of forest projects, auditors are measuring something that's much more difficult to quantify. Instead of determining that a factory is no longer producing a toxic spew, auditors must evaluate whether the project is adequately protecting an at-risk forest, measure how much carbon is exactly stored within it, and then certify the emissions savings under the Voluntary Carbon Standard. That way, investors can buy offsets knowing the claims have been reviewed.   

But the margin of error for determining the environmental benefits of such projects varies widely. It lies somewhere between 10 percent for cement and fertilizer projects and 100 percent for agriculture-oriented projects, according to a 2010 piece in Harper’s. Reporter Mark Schapiro also detailed the cozy relationships and revolving doors that two prominent auditors–which have verified roughly two thirds of the UN-approved emissions savings–share with carbon project developers, who provide payments to the companies that are charged with guaranteeing the veracity of their projects. 

The resulting audits are not particularly reliable. When the UN conducted spot checks of carbon auditors Det Norske Veritas and SGS in 2008 and 2009, the investigation revealed that both firms certified projects without visiting them, according to the Interpol report. Both were temporarily suspended from audits. In some cases, the auditors were ill-qualified to complete the work, lacking either training or "proper technical skills" for the projects to which they were assigned. Of course, these reviews only occurred in-house and not on the ground, Interpol and Harper’s note. "With the number of projects taking place in remote areas of the world, there will continue to be limits in the United Nations [sic] ability to properly police those projects," Interpol writes. In addition, according to the 2007 estimates a UN official reported in the Interpol study, 15 to 20 percent of Clean Development Mechanism projects granted carbon credits did not adequately prove that that the emissions savings were directly linked to outside investment. Though these findings were for projects on the compliance market, the likelihood of passing off false data on the voluntary market is even greater. 

Interpol's Stewart explained that even savvy investors don't really understand the process behind how the credits are generated, which makes it more difficult to detect when something is amiss. "It's not like a bag of rice or other commodities that can, at some point, be easily verified," he said. "Here, you'll have projects that are operating in very remote parts of the world, difficult to access. It becomes very difficult even for an independent auditor who goes, who can make it all the way out to that remote village or that remote town to verify that the project exists—and that they're doing what they say they're doing.” Carbon cowboys who set their sights on forest conservation can flourish quite easily because the product they sell, according to Tom Bewick, a Rainforest Foundation project manger who does work on the ground in Peru and Panama, is “an abstract commodity of nothing happening.”

In the voluntary market, it's really the investor's responsibility to make the determination whether the operators they're dealing with are legitimate or not. Because they're making a feel-good purchase, many times, it seems, they don't evaluate the sellers with much scrutiny. "Anyone can set up a project and sell voluntary carbon credits to anyone who will buy them," Chris Lang, of redd-monitor.org, wrote in an email. "The price can be whatever they can get away with. A large number of companies have been selling carbon credits as investments to members of the public -- targeting pensioners. Some people have lost their life savings to this scam."

In one such case, City of London police arrested Ian Macdonald and David Downes at London's Heathrow airport after a three-year trans-Atlantic investigation revealed that the pair had sold $9 million in fake or worthless carbon credits and shares to investors in the U.K. They had recruited cronies to use the phone lists from real companies to cold-call and convince their mostly elderly victims to sign up. "Some victims were contacted again months later and told companies they had invested in were the subjects of hostile takeovers and that they needed to buy more shares to protect their original investment. Individual losses ran as high as $600,000," a press release announcing the convictions read. The duo, which deposited the cash in American and Canadian bank accounts, lived ostentatiously. "We know they traveled the world," Detective Constable Claire Armson-Smith told British journalists. "Traveled business class. They had nice cars. Jaguars. Porsches. Nice clothes. Rolex watches.”

Another Australian, Brett Goldsworthy, who operates the company Shift2Neutral, has set up what he claimed were huge forest carbon credit projects that helped Australian PGA and the Sydney Turf Club events go carbon neutral. But, again, according to reporting by the The Sydney Morning Herald in 2011, the carbon projects, which Goldsworthy claimed were based in the Philippines, Democratic Republic of Congo, and Malaysia, were not not actually happening. Instead, Shift2Neutral, which claimed to have produced more than $1 billion worth of carbon offsets, had no employees besides Goldsworthy and was operating out of a small office in a Westleigh, Australia, shopping center. ''I realized there was something strange about Brett when we were negotiating with the tribes in the Philippines and he said he had a boatload of commandos waiting offshore in case he needed a 'hot extraction,''' Robert Hick, an investor who never received any compensation or returns from Goldsworthy, told the Herald. A website for Shift2Neutral is still active and has a list of press releases that outline its projects. 

***

Predictions of future deforestation from a Conservation International project description. (Conservation International)

Even forestry projects that receive certifications through independent auditors are surprisingly easy to manipulate, according to experts. In vast thickets of jungle, like the ones Nilsson was after, maps of the land are usually either poorly labeled or inaccurate, according to Stewart. Boundaries between forest parcels can often be in dispute. When a developer claims the rights to a particular section of forest, flaws in titling records may make it very difficult to prove fraud.

A British company’s overestimation of the amount of carbon stored in the forests of Liberia would have exposed the country to $2.2 billion of financial risk, an amount higher than its annual GDP.

Corrupt officials and tribal leaders may also claim the authority to make a deal they can't approve, according to Rainforest Foundation's Bewick, who also worked as a legitimate carbon credit developer in Colombia a few years ago. "They're just as likely to be part of the deal if they get something," he said. "The people that get screwed are the forest communities."

Even when there are clear collective titles over sparsely populated swathes of forest, there's still room for manipulation. 

"For a well-intentioned developer, such as we were, the collective title implies collective management and common pool resource distribution, which I would argue lends itself to great chance of sustainability," Bewick wrote later in an email. "For a fraudster, it can be an opportunity to manipulate the executive leadership into signing over the carbon rights to a massive land area. So, yes, a lot less people to deal with or defraud." 

The UN's guidelines for REDD projects are also easy to game. Developers are required to define an "imaginary" emissions baseline, or the rate at which logging and other forces would degrade the environment in the event that the proposed project didn't go into effect. "In essence, the purpose of this offset policy is to ensure that greenhouse gas reductions are 'in addition to what would have happened anyway,'" Martin and Walters wrote in the International Journal for Crime, Justice and Social Democracy article. While this might be easier to prove on a factory retrofit, by, for example, using an emissions device to measure how much carbon dioxide is released before modifications, determining how nature and markets will act on a forest in the future is a guessing game subject to significant corruption. "One can imagine situations where local collusion might occur in relation to future land use and, in establishing a baseline, propose … degradation activities that may never have been undertaken in reality," the authors continue. If developers imagined a scenario where half the forest was logged, for example, the carbon credits would be worth more and the returns on the market would be much higher, even if that amount of logging was unlikely.

When Nilsson was initially considering his carbon projects, the proposed baseline was already an area he planned on fudging. In an email dated September 21, 2010, he asked Pantone:

Are there any records of deforestation aerial or satellite photos showing the deforestation logging over the last 10 to 30 years this will give us an idea when the existing timber will be deleted thus endangering the Matses land and way of life[?]

Pantone replied two days later, offering the most accurate assessment of the difficulties in proving deforestation: 

There has been very little deforestation of Matses titled lands, with most being centered around the recently abandoned town of Buenas Lomas Antigua (the population moved to Buenas Lomas Nueva). I will send you links to the satellite images and other maps when I return from my trip next week.

Despite this information, Nilsson wrote back the same day: 

I note that there is very little deforestation on the Matses land Dan[.] [A]s long as we can demonstrate the rate of deforestation in Peru and how it can affect the Matses land in time [sic].
...we will have some work to do on this so the Matses land qualifies for a carbon credit project. Between all of us that is 1 American 2 Aussies 1 Irishwomen and team of experts I do not think it will not [sic] be a big problem.

Determining the amount of carbon actually stored in a forest may be more straightforward than predicting the future, but it, too, has several gaping holes where crooked operators can creep in. Satellite imagery, according to Stewart, does not, for instance, provide details on the different species of trees or how much carbon is stored in the soil. To do that, scientists hired by developers on the ground must survey the landscape. Due to the expense and difficulty in locating a parcel of forest in these remote areas, auditors rarely make the trip to evaluate their interpretations. 

Even if an auditor manages to visit the trees, it becomes a complex and monumental undertaking, according to Stewart. The results often involve calculations with a set of assumptions that vary based on the particular methodology the ecologist employs. “It can be relatively easy for a bribe to be paid … to the auditor to choose one methodology over another,” Stewart said. “If you didn’t know about the bribe, and you were just looking at the end result, it would be very difficult to just to notice that.”

In 2010, a British company’s overestimation of the amount of carbon stored in the forests of Liberia would have exposed the country to $2.2 billion of financial risk, an amount higher than its annual GDP.

***

Many of the conmen of the voluntary carbon market can expect to run free without oversight on the ground or law enforcement follow-ups. “Because it’s not a mandatory market, there often isn’t the same regulator oversight, and so some of these carbon cowboys aren’t necessarily being pursued by the law in the way they necessarily should be,” Stewart said. And coming up with a case is difficult because it’s hard to prove much beyond a simple breach of contract, even though the ultimate damage can devastate the environment and financially ruin communities.

“It’s a cesspool, but it’s a beautiful place.”

The isolation and lack of infrastructure on the ground in most of these far-flung REDD forest areas make them extremely vulnerable to audacious operators, who can then market the projects to unknowing investors abroad. In fact, the weak rule of law seems to be something that the cowboys depend upon. “If you’re a burglar and you’re wandering around the streets, and you’ve got every window with [a] neighborhood watch [sign],” Perryman said, “and then you go three blocks away and it doesn’t exist, that’s where you break in.”

Iquitos provided the perfect setting for Nilsson’s con. One of Nilsson’s translators there, an American who wished to remain anonymous, told The Atlantic he wasn’t going to defend his former employer, and that, given the undercover video from 60 minutes, his behavior seemed “pretty bad.” But all the lawlessness, corruption, and counter-narratives made it difficult to decipher the truth in a city where there was an “extremely fine line between a savvy businessman and a conman,” he said. In other words, it was somewhere where someone like Nilsson could thrive. “It’s the frontier,” the translator said. “A lot of [foreigners] go there because they ran out of roads somewhere else. It’s a cesspool, but it’s a beautiful place.”

According to a report from Global Witness in 2011, in Cameroon one guard "must police hundreds of thousands of hectares of forest and several well-financed European logging companies, yet he has no vehicle, no radio, and his shoes are several sizes too small." As Martin and Reece note, the typical location of a REDD project does not have the economic resources, regulations, or government to defend against scammers.

There is something especially insidious about these fake forest carbon credits. Investors and corporations who buy voluntary credits believe they are buying into something grander than, say, the efficiency improvements of a single factory in China. They believe they’re funding not only the preservation of trees, but also the wellbeing of local forest communities. Unwittingly, they might be financing the destruction of both.“Forests are not just a reservoir of carbon,” Stewart said. “They’re also ecosystems. They provide biodiversity. They provide habitat. They provide livelihoods for local people.”

Few investors would expect money designated for forest preservation to be funneled to an illegal logging operation, but in an unregulated system with fraudsters like Nilsson, it’s entirely possible.  “When you retrofit out a factory or you change the smokestacks and you change the machinery and you double-glaze the windows, you know that there’s going to be long-lasting benefits,” Stewart said. “Whereas with forests, they’re constantly under pressure for being cleared and for being logged. So the level of oversight is currently inadequate, I think, and not only does it need to be improved, it needs to be … sustainable and long-term.”

The voluntary market has provided a preview of what could happen if forest carbon credits ever hit the higher-stakes compliance carbon market. Though the EU-ETS has officially put off that possibility until at least 2020, California’s fledgling cap-and-trade system could approve foreign forest credits sooner. Carbon credits sourced to forest management projects located within the lower 48 states can already be used to meet compliance emissions standards there. Village communities in the forest of Chiapas, Mexico, wrote a letter to California Governor Jerry Brown and other officials opposing a recent project that California was considering for inclusion under the program, asking that forest offsets not be approved for use on the market. They criticized the technical expert that helped set up the plan, writing that she “was more focused on approving the REDD+ scheme to assure business interests than guaranteeing the protection of biodiversity, forests, and indigenous and peasant farmers’ territories and rights.”

Both Interpol and Europol said they expect that if forest credits do become eligible for trading on the compliance market, the same swindlers who profited off tax schemes and other loopholes will find ways to manipulate the forest projects as well.

“It’s a bit of a murky world really,” Europol’s Perryman said. “It’s a shame because obviously the whole idea from the politicians and legislators was to promote a cleaner world, and that has just been completely sunk. The good ideas and good intentions have been scuppered by the activities of fraudsters.”

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